New Direct Tax Code Bill : Main Points

Update (November 2015): Direct Taxes Code (DTC), which was first released in 2009, sought to replace the  existing Income Tax Act 1961 and Wealth Tax Act 1957 through a single legislation, with consolidation and improvements in the way taxes are collected in India. It sought to consolidate all direct taxes. The NDA Government has put the bill in cold storage and will not pursue it. As per finance minister, most of its proposals have already been incorporated in the Income Tax Act, there is not merit in pursuing it.

The Bill (older one) had become a happy hunting ground for the lawyers, In these 48 years, not only India has changed, the world has changed. Therefore, it is widely accepted that the present code is outdated-Chidambaram’s comment on introduction of draft of new “Direct Tax Code”

Finance Minister Pranab Mukherjee has recently unveiled a draft & discussion paper of the new Direct Tax Code which is proposed to replace the older version of Income Tax Act.

The bill is proposed to be tabled in parliament during the winter session after considering and incorporating, if found appropriate, the opinions on its provisions from the public. If it gets passed it will become law by 2011.
Note : The year 2011 marks the 50th year of the existing Income Tax Act (1961). Income Tax Act 1961 had replaced an earlier legislation of 1922 enacted during the British Raj.

Some Salient Features

• The new code will completely modernize and simplify the existing tax proposals for not only individual tax payers, but also corporate houses and foreign residents.
• The idea is to keep the provisions simple so that even an average taxpayer can understand the language, than having to go to chartered accountants and income tax practitioners.
• It will also introduce the concept of tax calculators.
• The language is very simple. By putting simple language and simple forms, It is meant to eliminate litigations as far as possible.
• It proposes to make it possible for most taxpayers to file their returns easily with new features like several easy to comprehend illustrations to guide them through the entire process, which today is often seen as complex and confusing.
• For corporates, it reduces tax rates and introduces newer tax concepts in international transactions, changes the basis of computing the taxability of business income, provides expenditure-based incentives and discontinues profit-based incentives.
• The new tax code aims for consolidation and amendment in laws relating to all direct taxes (income tax, dividend distribution tax, fringe benefit tax and wealth tax), besides establishing a system that facilitates voluntary compliance in tax payments. Also, when the scope is reduced for disputes and minimization of litigation, the tax system as a whole becomes effective and efficient.
• In business income, the basis of computation of business income is proposed to be changed from “business profits approach” to “income expense model.” More clarity would be required for computation of gross earnings and deductible expenses.
• The tax code aims at widening the base of taxation through discontinuation of incentives, reducing threshold limit for companies under transfer pricing etc while reducing the taxation rates. In transfer pricing, the law is new for Indians and needs more clarifications.
• The new code will also recast the powers of the Central Board of Direct Taxes, and induce more transparency in decision-making.The new code will also recast the powers of the Central Board of Direct Taxes, induce more transparency in decision-making and tune it to tax boards of countries like the US, Canada and Britain.

Highlights

1. Lowers the incidence of tax on corporate and individual incomes
2. Reintroduces wealth tax and capital gains tax, albeit at lower levels
3. Scope of income tax expanded to include value of perks, gifts, profit in lieu of salary and capital gains but excludes farm income
4. Removal of most exemptions
5. All long-term savings to come under EET
6. Tax exemption to PPF and other pension schemes on withdrawals accumulated up to March 31, 2011.
7. The code proposes to abolish STT.
8. Capital gains on shares and securities to be taxed as income.
9. Distinction between long-term and short-term capital assets to go.
10. Wealth tax cap to be hiked to Rs 500mn.
11. Wealth to be taxed on net basis; Amount in excess of Rs500mn to be taxed at 0.25%
12. Moves the base year for calculation of capital gains tax to April 2000
13. Hike in tax deduction limit on savings to Rupees 3 lakhs
14. Higher income tax slabs, lowering net payable taxes.
15. New tax slab
16. Up to Rs1.6 lakh: No tax
17. 10% tax for income between Rs160,000 and Rs10,00,000
18. 20% tax for income between Rs10,00,000 and Rs25,00,000
19. 30% tax for income over Rs25,00,000
20. Proposes highest tax rate of 30% on income of over Rs 25 lakh
21. Tax breaks on housing to be removed
22. Dividend will continue to be tax-free in the hands of investors
23. Effective corporate tax rate at 25% with no surcharge or cess
24. MAT to be levied on gross assets as against book profits now
25. MAT to be 0.25% for banking and 2% for others
26. MAT carry forward to be disallowed
27. Business losses to be carried forward indefinitely
28. No tax deduction on interest payable on any government security
29. Wealth tax liability to be discharged by payment of prepaid taxes
30. Income from certain transfers not to be treated as capital gains
31. Rationalization of taxes for all non-profit organizations
32. Annual disclosure of profits of non-life insurance businesses
33. Govt may enter overseas agreements for double taxation avoidance
34. No tax deduction on interest payable to banking firms and insurers

Salaried employee will be exempted of income up to Rs 1,60,000 a year from tax. Income up to Rs 10 lakh will be taxed at 10%, 10-25 lakh at 20% and beyond Rs 25 lakh at 30%. Currently, there is no tax till Rs 1,60,000 of income in a year. However, there is a 10% tax on income between Rs 1,60,000 and Rs 3 lakh, 20% between Rs 3 lakh and Rs 5 lakh, and 30% beyond Rs 5 lakh.